Unsecured debt with public insurance: From bad to worse$

In U.S. data, income interruptions, the receipt of public insurance, and the incidence of personal bankruptcy are all closely related. The central contribution of this paper is to evaluate bankruptcy protection and public insurance in a unified setting where each program alters incentives in the other. Our analysis delivers two striking conclusions. First, we find that U.S. personal bankruptcy law is an important barrier that prevents the public insurance system from improving welfare. Second, contrary to popular belief, we find that increases in the generosity of public insurance will lead to more, not less, bankruptcy. r 2006 Elsevier B.V. All rights reserved.